Business

Thursday August 20, 2009

Rein in expenses before implementing GS tax

Making a Point - By Jagdev Singh Sidhu


THE final straight for Budget 2010 is around the corner and as usual, the familiar drum beat for tax cuts and all sorts of tax breaks and reforms is heard both near and far.

And somewhat like clockwork, the subject of a goods and service tax (GST) gets regurgitated.

A consumption-based tax could have political repercussions while economically, there could be advantages as it is said to be a more efficient method of taxation where a larger percentage of the population and businesses will be captured by that tax.

And depending on the rate of the GST, such a tax can easily be expansionary. The Government initiated a study on GST with the intention of implementing it but has deferred it.

It is said the best time for a GST is when the national economy is growing healthily so that the negative political impact of such a tax and its potential inflationary impact gets smoothened out.

Given the amount of money the Government has been spending and the deficit it is incurring, having a tax system that captures a larger percentage of the tax paying population would seem like the obvious thing to do. But it will be the wrong move right now as there are a number of housekeeping matters that should be set straight before deciding to change the way tax is collected in the country.

For the tax paying public, arguments that we have been paying too much tax is a constant theme.

Deloitte conducted a study a few years back that compared the personal effective tax rates of six countries – Singapore, Japan, Hong Kong, the United States, Britain and Malaysia.

Using a family with a gross annual salary of RM230,000 with two children, Malaysia, which is the poorest of the six countries on per capita income basis, had the highest personal effective tax rate of between 19% and 36%. Singapore had the lowest rate at 4.1%.

Maybe the Government should look to raise revenue by getting some of the arbitrage profit itself. One way is by charging more for the approved permits (APs) it sells to the car industry, especially the open APs which are sold for a few ringgit compared with the market value of thousands of ringgit.

The second thing that needs urgent tackling before implementing a GST is government expenditure. The Government needs to rein in its expenses first before tapping the public for more tax money.

Suspicion of wastage has long dwelled in the minds of the public and every year, they get a taste of how taxpayers’ money is frittered away when the auditor-general releases its annual report.

Third, the Government must do away with spending more than it gets. The fiscal deficit has been an annual affair since the Asian financial crisis. Any prolonged rate of deficit is not sustainable especially when the bulk of government revenue is derived from oil, which now accounts for just above 40% of what it receives.

If we believe the literature out there that the country will run out of crude oil within the next two decades, then the urgency to wean off its dependence on oil revenues should be the way forward.

·Jagdev Singh Sidhu is a deputy news editor at The Star. He feels how much you save rather than earn is important.

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